Euro Weekly 14 September 2018

The pound has found perhaps an unlikely ally in EU negotiator Michel Barnier. His optimism about the possibility of reaching a deal and positive outlook on plans coming from the UK helped to give sterling a boost at the beginning of the week. In contrast, the pound had little response to the slew of ecostats released this week. GDP beat forecast with a provisional 0.3% expansion in that single month and growth of 0.6% in the three months to July. Manufacturing output was down by 0.2% in July with the broader industrial production increasing by just 0.1%. The annual changes were 1.1% and 0.9% respectively. Jobseeker numbers increased by fewer than forecast and the rate of unemployment was unchanged and on target at 4.0%. Earnings both with and without bonuses increased by more than analysts had predicted: including bonuses they were up by an annual 2.6% while basic pay rose by 2.9%. Yet sterling was a net loser on the day, falling by an average of 0.3% against the other ten most actively-traded currencies. There was a better news coming from the Bank of England, including Mark Carney’s confirmation that he would stay on until January 2020 to provide stability during the Brexit process. The BoE’s Monetary Policy Committee voted to hold firm with interest rates on at 0.75% but raised its growth forecast to 0.5% for the third-quarter, up from 0.4%. This gave the pound a slight boost, although as with the BoE forecast, it was tempered by the shadow cast by the uncertainty of Brexit.

The ECB also announced their interest rates this week and kept the main rate at 0% as expected. However, the accompanying speech suggests that the euro will not be content waiting in the wings. Jean-Claude Juncker has called on the European Union to champion the euro as a global currency to rival the dollar and demanded more powers for Brussels to flex its muscles on the world stage.

American nonfarm payrolls went up by a provisional 201k in August, about 10k more than analysts had predicted, but the increase was neutralised by a 10k downward revision to the previous month’s figure. The other good-news-bad-news trade-off was the 2.9% annual increase in average US hourly earnings: it was of little value in an environment of 2.9% inflation. Regarding the US producer price index data, the core index – excluding food and energy prices – went down by 0.1% in August. It has logged similar declines in recent years but this time investors did not like it. The greenback not only lost ground to the euro and the pound, but even struggled against the Turkish lira and the Mexican peso. The matter of trade is also weighing on the US dollar. When it emerged that senior US administration officials had invited their opposite numbers in Beijing to another round of talks, the dollar took a couple of steps to the rear. Overall the dollar was down by an average of 0.6% against the other ten most actively traded currencies at the news.

The Canadian dollar has been having a difficult time and the employment figures were not helpful to the Loonie: unemployment rose to 6.0% with the loss of 52k jobs. There was better news later in the week when the price of oil went up by 3.4%. As an oil producer, this created some optimism for Canada’s currency but not a direct correlation because the Canadian dollar’s biggest upward move came six hours after oil took off. The likelihood is that the Loonie also gained some traction from optimism about a NAFTA deal.

Overnight Westpac’s index of Australian consumer confidence fell three points to 100.5. However, the Sino-US trade talks story that hurt the US dollar was positive for the Australian one. The Aussie received further help from the employment data, this week. Expectations today were for 15k new jobs. When 44k were delivered, the majority of them full-time positions, investors just had to mark the Aussie higher. After the news, it strengthened by an average of 0.6%, taking more than a cent and a half off sterling.

The recently struggling New Zealand dollar was also heading for a 0.8 per cent weekly gain after markets were cheered by news that the US and China may return to the negotiating table. The tensions have been weighing on the kiwi and the possibility of an end to the impasse was good news down under. Next week sees the release of the second quarter gross domestic product data; if this is stronger than the central bank anticipates, it may help the kiwi.